Central bank digital currencies for cross-border payments

1 Central bank digital currencies for cross-border paymentsJuly 2021 Report to the G20 This publication is available on the BIS website ( ). Bank for International Settlements 2021. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-476-3 (online) Central bank digital currencies for cross-border payments i Contents Executive Summary .. 1 Introduction .. 2 1. Domestic CBDC designs and cross-border considerations: a primer .. 4 Improving cross-border payments efficiency is an important motivation for CBDC work .. 4 2. Stocktaking potential CBDC designs in cross-border payments .. 5 Current Central bank thinking on cross-border CBDC use .. 6 cross-border aspects of advanced retail CBDC projects .. 8 Enabling retail or wholesale interoperability of CBDC arrangements .. 8 CBDC arrangements in practice: current projects with cross-border focus .. 11 Central bank considerations regarding interoperability, mCBDC arrangements and FX conversion.

2 12 3. Opportunities and risks associated with cross-border use of CBDCs .. 13 Possible benefits of CBDCs with regards to existing frictions in payments .. 13 Existing frictions in cross-border payments .. 13 How CBDCs could help alleviate existing frictions .. 13 International macro-financial implications of cross-border CBDC use .. 15 Potential increase in cross-border 15 Potential financial stability risks and currency substitution .. 16 Reserve currency configurations and backstops .. 17 Early Central bank thinking on risks associated with cross-border use of CBDCs .. 18 4. Conclusion and considerations for further work .. 19 Glossary .. 20 References .. 23 Annex 1: Projects for cross-border CBDC arrangements .. 25 Annex 2: List of building blocks for enhancing cross-border payments .. 29 Annex 3: Building block 19 - factoring an international dimension into CBDC design .. 31 Actions and milestones .. 31 Action 1: Stocktaking and analysis of different CBDC designs .. 31 Action 2: Development of options for access and/or interlinking.

3 31 Action 3: Design study and dissemination .. 31 Annex 4: Composition of the Future of payments Working Group (FoP) .. 32 Central bank digital currencies for cross-border payments 1 Executive Summary The G20 has made enhancing cross-border payments a priority and endorsed a comprehensive programme to address the key Faster, cheaper, more transparent and more inclusive cross-border payment services would deliver widespread benefits for citizens and economies worldwide, supporting economic growth, international trade, global development and financial inclusion. To that end, this report takes stock of the international dimension of Central bank digital currency (CBDC, see glossary) projects and the extent to which they could be used for cross-border payments . The report also investigates possible macro-financial implications associated with the cross-border use of CBDCs. The analysis does not imply that Central banks mentioned in this report have reached a decision about issuance of a CBDC.

4 To date, no major jurisdiction has launched a CBDC and many design and policy decisions are still unresolved. Also, most CBDC investigations by Central banks focus on domestic issues and use cases. Given this early state of play, the considerations in this report are exploratory and examine cross-border implications of CBDCs in a situation in which CBDCs are widely used. In practice, domestic issuance of CBDC will be subject to considerable further economic and practical examination before exploration of cross-border use will gather pace. Furthermore, enhancements in other areas of the cross-border payments programme, such as aligning regulatory, supervisory and oversight frameworks for cross-border payments , Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) consistency, Payment versus Payment (PvP) adoption and payment system access2 will be critical for cross-border CBDC use. Against this background, the report identifies a number of questions that would need to be taken into account in order for CBDCs to support the enhancement of cross-border payments .

5 The report approaches these questions from two angles: first, from the practical perspective of how a cross-border payment infrastructure with CBDCs could be set up; and second, from a macro-financial perspective, examining the potential increase in cross-border flows, possible financial stability risks and currency substitution, and reserve currency configurations and backstops. cross-border payments with CBDCs can be envisioned in two fundamentally different ways. The first scenario assumes availability of a retail3 CBDC of a given jurisdiction to anybody inside and outside of that jurisdiction, with limited to no coordination between the issuing Central banks. In this case, if the design allows for anonymous payments like cash, it would by default be accessible to foreign residents. In practice, however, relatively few Central banks are considering fully anonymous systems. In contrast to cash, various restrictions on cross-border use could be imposed via the technological and regulatory design of the CBDC.

6 This first scenario is conditioned by the domestic design of a CBDC. The second scenario assumes some degree of interoperability between CBDCs based on access and settlement arrangements to facilitate the cross-border use of CBDCs from two or more jurisdictions. Such arrangements can connect both wholesale and retail CBDCs across borders, imply strong cooperation among Central banks, and include technological, market structure and legal aspects. This second scenario which is the main focus of the report relies on design choices of the interoperability infrastructure. Both scenarios are discussed in the report and illustrated with examples of ongoing projects. Introducing a CBDC could have a range of macro-financial implications. Ultimately, those implications will depend on several factors, such as the level and nature of international adoption, and on 1 See FSB (2020a, b, c), CPMI (2020a, b). See also Annex 2. 2 These topics are addressed in building blocks 4, 5, 9 and 10, respectively.

7 See also CPMI Stage 2 report to the G20 technical background report, July 2020. 3 A retail (or general-purpose) CBDC could be used by individuals to pay businesses, shops or each other, while a wholesale CBDC would be designed for restricted access by financial institutions to settle trades in financial markets, similar to today s Central bank reserve and settlement accounts. 2 Central bank digital currencies for cross-border payments the degree of collaboration among issuing and recipient countries. International use of CBDCs could potentially increase cross-border flows, but specific design choices of CBDCs could limit such use. The implications would differ for wholesale versus retail CBDCs. Hence, multilateral collaboration to agree on design principles will be key to addressing concerns of Central banks regarding currency substitution risk, capital flow volatility, and contagion risk. These macro-financial implications of cross-border currency use are not exclusive for CBDCs, but also exist for privately issued forms of money.

8 However, CBDCs could allow jurisdictions greater room of manoeuvre to mitigate potentially adverse macro-financial implications. CBDCs have the potential to enhance the efficiency of cross-border payments , as long as their design follows the Hippocratic Oath for CBDC design and its premise to do no harm , as highlighted by the Group of Central banks (2020). The coordination of national CBDC designs could lead to more efficient cross-currency and cross-border payments . cross-border CBDCs could offer the opportunity to start with a clean slate , and address the frictions inherent in current cross-border payment systems and arrangements from the outset. The enhancements could be made by offering secure settlement (see glossary), reducing costly and lengthy intermediation chains throughout the payment process, and eliminating operating hour mismatches by being accessible 24/7. It is necessary to continue deepening the analysis on CBDC designs, especially regarding options for access and interlinking of CBDCs, including interoperability with non-CBDC payment infrastructures and arrangements.

9 Further actions in this workstream will continue to investigate these questions, both from a practical and theoretical perspective and by leveraging analytical synergies from other building blocks of the cross-border programme, such as the investigation into global stablecoin arrangements and the feasibility of new multilateral platforms for cross-border payments . Introduction cross-border payments are commonly criticised for their high cost, low speed, limited access (see glossary) and insufficient transparency. With a view to addressing these challenges, the G20 in October 2020 endorsed a roadmap to enhance cross-border payments . The roadmap was developed by the Financial Stability Board (FSB), in coordination with the Committee on payments and Market Infrastructures (CPMI) and other relevant international organisations and standard-setting bodies. The frictions contributing to these challenges include fragmented and truncated data formats (see glossary), complex processing of compliance checks, limited operating hours, legacy technology platforms, long transaction chains, funding costs and weak competition.

10 A CPMI report (CPMI (2020a, b)) describes the necessary elements of a response, in the form of a set of 19 building blocks (see Annex 2). Following the roadmap s endorsement, the work has moved to advancing and implementing the building blocks outlined in the CPMI report. Many of the roadmap s building blocks seek to improve the existing payments ecosystem. As part of the more forward-looking work of the roadmap, one building block (19) considers how to factor an international dimension into CBDC design. This report constitutes a response to action 1 of the roadmap for building block 19, which invited (i) the CPMI in collaboration with BIS Innovation Hub, International Monetary Fund (IMF) and World Bank4 to conduct a stock-take of provisional domestic CBDC designs and Central bank experimentation and the 4 In line with the World Bank s focus on cross-border payments and remittances as part of the IMF-World Bank Bali Fintech Agenda. Central bank digital currencies for cross-border payments 3 extent they could be used for cross-border payments (see Section 2)5, and (ii) the IMF in cooperation with other relevant stakeholders, to analyse international macro-financial implications of cross-border CBDC use (see Section 3).